Capital Dividend Account (CDA)

Definition

The Capital Dividend Account (CDA) is defined in ITA s.89(1) and is a notional account available only to private corporations resident in Canada. It aggregates certain non-taxable receipts, most notably the untaxed portion of capital gains and the proceeds of life insurance policies net of the policy's adjusted cost basis. A corporation can elect under ITA s.83(2) to pay a capital dividend to its shareholders, which Canadian-resident shareholders generally receive tax-free. Capital dividends paid to non-residents are generally subject to 25% withholding, reduced where an applicable treaty permits. See CRA’s capital-dividend folio.

Key rules

• Private corporation only: public corporations cannot maintain a CDA.
• CDA additions include:
  1. The non-taxable portion of net capital gains (typically 50% of the gain under the current inclusion rate regime).
  2. The non-deductible portion of capital losses offsets CDA (so net capital gains only).
  3. Life insurance proceeds received on the death of an insured, less the adjusted cost basis (ACB) of the policy.
  4. Capital dividends received from other corporations.
  5. The non-taxable portion of gains from eligible capital property dispositions (pre-2017 legacy).
• CDA reductions:
  1. The non-deductible portion of capital losses.
  2. Capital dividends paid.
• Election (ITA s.83(2)), Form T2054: must be filed by the earlier of the day the dividend becomes payable and the first day any part is paid. Must include a certified copy of the directors' resolution and a CDA calculation immediately before the dividend becomes payable.
• Late filing: subsection 83(3) permits a late election with the required estimated penalty. For each month or part-month late, the penalty is the lesser of one-twelfth of 1% of the dividend and $41.67. Subsection 83(3.1) limits relief after an unanswered CRA request. See CRA’s late-election calculation.
• Excess election tax (ITA s.184(2)): if the elected amount exceeds the CDA balance, a 60% Part III tax applies unless a s.184(3) election is filed to treat the excess as an ordinary taxable dividend to the shareholders.

Inclusion rate note (2026)

As checked on September 23, 2026, Income Tax Act section 38 uses a one-half inclusion rate for ordinary capital gains, subject to its stated exceptions. Accordingly, the non-taxable half of an ordinary gain enters the CDA capital-gain component, net of the non-deductible portion of capital losses. Historical transactions retain their applicable rules; the current rate is not a reason to recompute every older transaction at 50%.

Example

Assume Pacific Realty Inc. is a Canadian-resident private corporation with Canadian-resident shareholders, zero opening CDA, no capital losses or other adjustments, and no selling costs. It sells passive investment land in March 2026 for $1,000,000 with an ACB of $400,000.

• Capital gain: $600,000.
• Taxable capital gain (50%): $300,000, included in investment income under these assumptions. Refundable Part I tax may add to NERDTOH, subject to its statutory limits (see Refundable Dividend Tax On Hand (RDTOH)).
• Non-taxable half: $300,000, added to CDA.

Pacific Realty holds a key-person life insurance policy on its founder. In this hypothetical example, the founder dies in November 2026 and the corporation receives $2,000,000 of insurance proceeds. The policy's ACB on the date of death is $150,000.

• CDA addition: $2,000,000 − $150,000 = $1,850,000.

Combined CDA balance after both events: $300,000 + $1,850,000 = $2,150,000.

On December 15, 2026, the directors resolve to pay a $2,000,000 capital dividend. They file Form T2054 with the director's resolution and CDA worksheet.

Shareholder treatment: the capital dividend is received tax-free. No gross-up, no DTC, no entry on the shareholder's T1.

Remaining CDA after payment: $2,150,000 − $2,000,000 = $150,000.

Common mistakes

• Missing the election deadline and assuming a late resolution alone fixes it. A valid late election requires the prescribed documents and penalty under subsection 83(3).
• Electing a capital dividend larger than the CDA balance. Part III tax of 60% is punitive. Calculate the available CDA immediately before the dividend becomes payable, and meet the earlier-of-payable-or-paid filing deadline.
• Ignoring the insurance ACB. Only the excess of proceeds over ACB enters CDA; the ACB portion does not.
• Subtracting the whole capital loss rather than its non-deductible portion in the cumulative capital-gain component. The component and other CDA components must be calculated under their own rules.
• Paying a capital dividend from a public corporation or a corporation that is not resident in Canada. CDA is not available.
• Missing the T2054 documentation. Include the prescribed resolution and CDA calculation; CRA says Schedule 89 may be used for that calculation, rather than requiring it in every case.

Related concepts

• Refundable Dividend Tax On Hand (RDTOH)
• General Rate Income Pool (GRIP)
• CCPC Status